MNI INTERVIEW: Politics Impair CBRT MonPol Impact-CHP's Ozlale

The Central Bank of Turkey’s October decision to cut rates despite weaker disinflation demonstrates both the limits of its independence and the inability of monetary policy to combat domestic inflation, a leading Turkish economist and former central bank advisor told MNI.

“The link between interest rates and inflation has weakened significantly. The CBRT’s latest interest rate decision supports this view,” said Umit Ozlale, who has been an MP for the main opposition Republican People’s Party (CHP) since 2023, following a career as professor and chair of economics at TOBB University of Economics and Technology and Ozyegin University (See MNI INTERVIEW: CBRT October Cut 'Premature'-Ex-CBRT's Unalmis)

The CBRT on Friday announced it expects inflation to end the year between 31% and 33%, having previously seen it between 25% and 29%, but left annual targets for 2026 and 2027 unchanged. (See MNI EM INTERVIEW: CBRT To Cut 100Bp in Dec, Keep Targets-Turhan)

Inflation will be around 31% by the end of 2025 and 24% by the end of 2026, versus that year’s target of 16%, with a series of rate cuts from now on and fiscal expansion from the second half of next year worsening long-term inflation expectations, said Ozlale, who has advised both the CBRT and the Turkish ministry of finance.

“Ultimately, price stability cannot be achieved through further monetary tightening; more structural measures are needed.”

Turkey’s current fiscal policy also fails to support central bank efforts to combat inflation, he said, adding that it provides little support either for the green transition, technological and industrial change or even for adequate social protection.

FISCAL POLICY

“Fiscal policy must be strengthened to support the CBRT’s efforts to achieve price stability. While we are currently debating the 2026 budget in parliament, there are no signs of major improvement next year,” he said.

“A low debt ratio is only meaningful if it helps reduce borrowing costs. For example, the most recent 10-year government bond was issued at an interest rate of 40%, while market expectations for inflation by November 2026 are around 24%. Can we really say that a low debt-to-GDP ratio helps to borrow at a lower cost? I don’t think so.”

The CBRT sold record amounts of foreign currency to defend the lira amid market turmoil following the March arrest and jailing of CHP leader Ekrem Imamolgu. 

FX reserves have since recovered to USD80.38 billion, with total central bank reserve assets of USD183.6 billion at the end of October, and Ozlale said the CBRT would not hesitate to burn further foreign exchange reserves again if necessary, adding that Imamoglu’s arrest damaged Turkey’s credibility and its attractiveness for foreign investment.

“This excessive reserve policy by the CBRT is very costly, especially given high interest rates. Likewise, the Treasury’s excess TL reserves are also costly. These reserve policies, pursued at the expense of higher borrowing costs, clearly show both the loss to society and the policymakers’ focus on managing market expectations.”

Fatih Karahan is a competent and respectable governor of the CBRT, said Ozlale, but he added his personal qualities “matter only to a limited extent, since the market fully understands that President [Tayyip] Erdoğan will not hesitate to force his resignation if policies contradict his political interests.”